Somehow, this site developed a strong Canadian audience. There are as many Canadian readers here as readers from the state of Georgia, which is a little perplexing to me because I can at least understand why people from Atlanta end up here—practically every investor there owns some Coca-Cola, and I have enough posts on that to bring ‘em in through the search engines. But I don’t know that much about Canadian stocks and the international rules regarding taxation, although I appreciate the country’s underappreciated banking history that does not get nearly the amount of global acclaim that it deserves.
I once attended an investment conference hosted by the great great grandnephew of an early 20th century American president, and all he did was rave about his investments in Canadian bank stocks. He said that they had a superior culture to American banks because there is less pressure to act greedy. In the United States, we pass things like Dodd-Frank and take stabs at controlling the banking sector with thousands of pages of regulations. But still, we Americans find a way to blow up the banking sector every generation or so (Panic of 1893, Panic of 1907, Great Depression 1929-1933, The Secondary Crisis with U.S. Banks containing British exposure in 1973-1975, The Savings & Loan Crisis 1988-1992, The Financial Crisis 2008-2009.)
If an American investor wanted to construct a bank stock portfolio at any time since the Civil War, it seems that a middle-aged individual putting together a bank stock portfolio in the late 1930s or early 1940s would be the only person able to subsequently enjoy a lifetime without seeing a chunk of their holdings get destroyed due to bankruptcy, excessive shareholder dilution, or takeovers during periods of low market valuations. And, of course, who the heck is going to be in a position to put together a portfolio of bank stocks during a period when American unemployment topped 25%, Pearl Harbor got bombed, and the United States had to militarize 200,000 young men per month to fight in the European or Pacific Theatre.
In other words, I can’t think of any realistic conditions in which an investor could go through a lifetime of building positions in American bank stocks without experiencing significant capital losses along the way. That is not the case in Canada. A quick Google search reveals pages and pages of stories about Canadian trust funds being stuffed with bank stocks to provide the fat dividend payouts to support a nice standard of living.
You have companies like The Bank of Montreal, which has made a dividend payment every single year since 1829. The Bank of Nova Scotia isn’t far behind, paying uninterrupted dividends since 1832. Four other banks in Canada have records dating back loosely to when the United States was going through its Civil War issues: The Toronto-Dominion Bank has been making payments since 1857, The Canadian Imperial Bank of Commerce has been making payouts since 1868, The Royal Bank of Canada has been making payments since 1870, and The Laurentian Bank of Canada has been making payments since 1871.
I’m not sure the culture in America’s finance sector could have support 150+ year dividend success stories like that. The incentives to deliver short-term growth rather than improve structural stability are just too great. No executives get bonuses for having the highest Tier 1 Common Capital Ratio in the industry. But each of the Big Five CEOs at America’s banks get bonuses tied to improvements in the stock price, and the belief is that you raise the stock price by elevating the earnings per share. Leverage and short-sighted management practices like buying back stock with borrowed money or lending to customers with only fair-weather repayment abilities is how you set yourself up for shareholder wipeout when a deeper than normal financial crisis occurs.
There are some places, like U.S. Bancorp and M&T Bank, which offer a superior culture to most other U.S. banks. But I’m not sure it is superior to what you see in Canada. At U.S. Bancorp and M&T Bank, you have men like Richard Davis and Robert Wilmers who have excellent reputations that gives them the persuasive authority to draw lines in the sand and say, “No, we won’t overleverage like that.” It also helps that they run loan portfolios that are growing at 7% so the shareholders don’t truly have to choose between stability and reckless growth. They get both stability and satisfactory growth through the loan portfolio.
Canadian investors also have George Weston sitting in their backyard. You make a whole lot of money off of the American tradition of getting young girls to go door-to-door and throughout the family to sell Girl Scout cookies. When an American buys a box of Girl Scout cookies, there is one of two places the money goes. In some areas, the licensing arrangement is through Little Brownie Bakers which is owned by Keebler and is a subsidiary of Kellogg. So you are putting in the pockets of Kellogg’s shareholders every time you eat a Thin Mint. But there is a licensing arrangement through ABC Bakers, which is a subsidiary of Interbake Foods that flows through to George Weston.
I don’t cover George Weston on the site because I don’t endorse the management team’s capital allocation policies. The take Girl Scout cookie profits and buy drug stores in questionable locations and does things like buy hummus. I understand why this is happening—the Girl Scout cookie market is saturated in the United States and there is not a whole lot of room for growth, and pursuits of that growth could backfire because the seasonal exclusivity of eating Girl Scout cookies is what contributes to the appeal.
But that does not mean that investing into low return on capital enterprises is the answer. I don’t write about George Weston because it reminds me too much of Coca-Cola in the early 1980s in which Coca-Cola was buying Shrimp Farms and purchasing Columbia Studios. There’s too much cash flowing from the core business that it leads to a lack of discipline. If I were running George Weston, I’d sell off these cutesy side ventures and raise the dividend from 29% of profits to half of profits. I’d put some money towards advertisement and maintenance of the core business, and I’d use the rest of the excess profits to systematically repurchase the stock each year like IBM. This strategy would work out less well if the stock started to get expensive, but I still think it is better than what the company is doing right now.
That said, it hasn’t been a great hardship to own George Weston. The lucrative Girl Scout profits have been enough to lift the earnings per share and stock price even as the management team has made questionable decisions with the profits. The dividend per share grew from $0.44 in 1999 to $1.68 at the end of 2014. If you were collecting $14,000 in annual dividends in 1999 from George Weston, you could have spent every single dividend since then and you’d still be collecting $53,000 per year in cookie dividends which as much as the average hard-working American household generates over the course of the year from salary.
That’s part of the beauty of large economies. You just have to find your one spot, and stick with it. You don’t have to own an American Dividend Aristocrat, a high-tech startup, or an index fund to get rich. There are so many pathways to building wealth. There is no one way. The common principle is that wealth-building involves acquiring cash-generating assets. You live below your means, find something that pumps out cash each month, and then hold on to it for dear life as you collect the cash and find something intelligent to do with it. That’s the principle of truly successful investing—there are almost no limits to the diversity of means you can use to accomplish that end.
That’s my way of saying—hey Canadian investors, I know you are here. I’m thankful you take time to read my site, especially since almost none of my content contains Canadian-specific themes. The Canadian banking sector is a thing of beauty, and the more I think about it and research it, the more I find it better suited to long-term investors than the American offerings. And companies like George Weston just sort of lurk there, never getting much attention, but creating significant wealth for people that know about it. Despite the flaws, the core business is just too lucrative to be undone. The practice of buying Tagalongs, Trefoils, and Thin Mints is an annual ritual, and it results in a lot of wealth getting shipped from the pockets of American households to the Canadian investors who find themselves sitting on large blocks of the cookie company’s stock. As long as you find companies that provide entrenched products and services that generate a strong profit over time, it does not matter what country you are from to apply the general principles necessary for financial success.
Originally posted 2015-05-29 16:40:09.